A quartet of small-cap buys

Another earnings beat

Aim-traded Somero Enterprises (SOM:150p), a Florida-headquartered company that specialises in the design, assembly, and sale of patented, laser-guided concrete levelling equipment for commercial floors, has confirmed that the strong momentum seen across the business at the time of the company's last update in mid-May has been maintained into early July.

Somero reported strong activity levels in both North America (accounting for two thirds of fiscal 2014 revenues) and the Middle East, with Europe, Southeast Asia, and Latin America each also contributing to overall growth. The healthy North American project pipeline, coupled with technology upgrades, are key drivers behind the higher demand being seen for Somero equipment. In China, activity levels increased in May and June after a slower than expected start to the year and Somero's board reports "healthy momentum in demand for our products there." So with business picking up, the region is still expected to post its fifth consecutive year of growth which is reassuring given that China accounted for 16 per cent of Somero's sales last year.

The net result is that the company is currently trading slightly ahead of analyst forecasts for the financial year to end December 2015. Analyst Mark Hughes at equity research firm Broker Profile was previously predicting that current year adjusted pre-tax profits will rise from $14.5m to $15.5m (£10m), based on a 10 per cent increase in revenues to $65.7m, to produce adjusted EPS of 11.6p at current exchange rates and after applying a 34 per cent tax charge. Mr Hughes is also pencilling in a further 9 per cent hike in the dividend per share to 6¢, or 3.9p. On this basis, Somero's shares are rated on a modest 12 times current year cash adjusted earnings after factoring in net funds of 7.5p a share. Moreover, that rating will drop again as Somero should be able to produce operating cashflow north of $14m this year, and net cashflow of around $5.6m after capital expenditure and taxation. That not only leaves enough cash aside for a raised dividend, but I conservatively estimate the cash position will grow to at least 12p a share by the year-end. It could be more.

So having initiated coverage when the share price was 140p ('On solid foundations', 22 April 2015), and reiterated that advice at the same price at the time of the last trading update ('Three value plays', 19 May 2015), I feel that my 185p year-end target price is still achievable. Trading on a bid-offer spread of 146p to 150p, I continue to rate Somero's shares a buy.

Rollercoaster ride for Globo's shares

Shares in Aim-traded Greek mobile software provider Globo (GBO: 49p) rallied towards the February 2014 high of 69.5p, but have been under severe pressure since peaking out at 64p last month in light of the ongoing Greek economic and banking crisis.

To recap, having issued a conditional buy recommendation on the shares at 47p aiming for an initial target price of 60p ('Going global', 2 February 2015), and then reiterated that advice ('Break-out looms for mobile wonder', 12 May 2015), I subsequently upgraded my target price to 69.5p ('Catalysts for share price moves', 4 June 2015).

That's still not an unrealistic target and one that is well supported on valuation grounds: analysts predict Globo's EPS could hit 8.7p a share in 2015, up from 6.7p in 2014. This means the shares are rated on a prospective PE ratio of 5.5, hardly a punchy rating for a software company with a growing international bias and one looking to make complimentary acquisitions stateside.

Reassuringly, the company has just issued a detailed statement to the market regards the impact of the ongoing Greek crisis on its operations. There are a number of important points to flag up.

Firstly, chief executive Costis Papadimitrakopoulos rightly notes that only 12 per cent of group revenue was derived from Greece last year, mainly enterprises with international profiles, shipping companies and hotels, and all receivables relating to the 2014 Greek sales have been collected. Given the high growth rates Globo is generating from its international operations, revenue derived from Greece is only likely to account for between six to seven per cent of group revenue in the 2015 fiscal year.

Secondly, although 42 per cent of the group's 569 staff are based in Athens, in the event of Greece exiting the euro, the costs from the Greek operations would actually be reduced given the likely significant devaluation of the currency. Importantly, Globo's buildings in Athens are equipped with power generators, and with fixed and satellite network connectivity, so that in the event of any potential outage employees can continue to perform their functions.

Thirdly, Globo had net funds of €41.2m (£29.2m) at the end of March 2015, a sum equivalent to almost 8p a share, but importantly has its cash reserves located outside Greece, with only €100,000 in Greek bank accounts to cover running costs in Athens. As revenues generated from Greek operations are significantly below payments to Greek suppliers and to local employees, the company is comfortable in executing additional payments electronically from bank accounts outside of Greece. As a result, Mr Papadimitrakopoulos expects "no interruption from the imposed capital controls which are focused on controlling the export of currency from Greek accounts."

Fourthly, Globo Technologies S.A., the company's 49 per cent-owned affiliate, continues to grow and expand its business as a leader in the Greek IT industry. During 2014 Globo Technologies' revenue grew by 28 per cent to €32.2m and reported cash profits of €6.1m. It's well worth noting that its business is conducted with private enterprises and the Greek Government through projects which are funded by European Structural Funds, thus guaranteeing collection.

Mr Papadimitrakopoulos also adds that "Globo's trading performance remains strong and we are looking forward to another successful year of growth and to becoming established as one of the global leaders in the Mobile Enterprise Market". I would agree and I see the marked sell-off in Globo's shares as a buying opportunity, and one that is most likely to yield significant financial rewards when investors take a reality check. On a bid-offer spread of 48p to 49p, I rate Globo's shares a buy.

Stanley Gibbons coining it in

There were a number of positives to be taken from the full-year results from Stanley Gibbons (SGI:258p), the most famous name in stamps and a business now encompassing coins, collectables, antiques and auctions.

Firstly, shortly after the fiscal year-end, the company completed one of the high value sales within its retail business which were not completed in the run up to the March year end, and which led to the profits shortfall in the 12-month period. This gives confidence that the sales were merely delayed rather than lost for good.

Secondly, the recent successful launch of new online collectables market place, marketplace.stanleygibbons.com, will make the business less exposed to high-value sales from high net worth clients as the spread of business broadens. Philatelic trading and the stamp retail operations accounted for £23.9m of the company's total revenue of £56.6m in the last financial year, and £6.68m of trading profit, but the company's largest client accounted for £3m sales alone. Diversification is important to smooth out income streams and avoid the possibility of lumpy high value sales impacting profit estimates in the future. Indeed, philatelic trading profits declined from £4.9m in a buoyant first half to £1.8m in the second half.

Secondly, the acquisition in November 2013 of Noble Investments, the international rare coin, banknote, medal and stamp dealer and auction house, is clearly paying off and generating cross selling opportunities. Baldwin's, Noble's highly respected brand in coins, established in 1872, contributed sales of £9.5m and trading profits of £2.4m in the 12-month period.

Thirdly, the acquisition of Dreweatts & Bloomsbury auctions and Mallett Antiques last autumn has increased the company's exposure in memorabilia and fine antiques, jewellery and watches, areas that are lower margin than coins and stamps, but provide a solid income stream nonetheless. Trading profit here was £1.7m on revenue of almost £18m.

The net effect of these acquisitions is that philatelic trading now accounts for 55 per cent of Stanley Gibbons' total trading profits, down from 71 per cent in the 2014 fiscal year, the contribution from coins has more than doubled to around 24 per cent, and dealing and other collectibles now accounts for 14 per cent of profits, rather than 9 per cent in 2014. It's definitely a more rounded business mix. It's also worth noting that online auctions are proving a boon for Stanley Gibbons with sales rising by a third to £8m in the fiscal year.

Of course, internet development costs have to be taken into consideration and this meant that pre-tax profits of £7.5m last year were £1.3m lower due to start up losses on online activities. But even after factoring in a £3m hit from these activities in the current financial year, analysts at Peel Hunt still expect Stanley Gibbons to grow underlying pre-tax profits by a third to £10m and deliver EPS of 17p, up from 12.9p in fiscal 2015. Excluding internet development costs, EPS would be about 22p. It's only fair to flag up too that with the board aiming for dividend cover of between 2.5 and 3 times net profits, then the payout was cut from 7p to 5p a share in the last financial year. That said, if Stanley Gibbons delivers EPS of 17p this year, then a payout of around 6p is on the cards.

It's also worth pointing out that the company has been taking advantage of "exceptional opportunities to purchase high value quality collections, resulting in the company holding significant unrealised profit within stockholding of rare collectibles at the year-end." Inventories increased from £42m in March 2014 to £53.8m by the end of March 2015, but analyst Charles Hall at Peel Hunt estimates that the retail value of these stocks is closer to £150m. To put that figure into some perspective, Stanley Gibbons only has a market value of £119m and a net asset value of £82.4m. Net debt was £11.7m at the period end. In other words, mark stocks to market value and the company's adjusted book value is nearer 380p a share.

Indeed, it was the hidden value in the company's balance sheet which was a key factor in including the shares in my 2015 Bargain share portfolio. Admittedly, the shares have fallen from 282p to 258p since then, but rated a third below adjusted book value, and on only 11.6 times EPS estimates before internet development costs, I still see value here especially as the market for rare collectibles and fine art remains buoyant. Buy.

How Simon Thompson's Bargain Shares portfolio has fared in 2015

Amber alert for takeover windfalls

International Consolidated Airlines (IAG:494p) has now issued a formal cash offer of €2.50 a share for Irish carrier Aer Lingus (AER:€2.40) after the Irish government agreed to sell its 25 per cent stake to IAG last month. Subject to Ryanair (RYA:€12.07) accepting the offer for its 29.9 per cent shareholding, this looks a done deal. The budget airline is in line to book a €405m windfall from its stake in Aer Lingus, or 80 per cent above book value so I really can't see shareholders of Ryanair being too happy if the company doesn't accept the cash offer.

This is very positive news for Aim-traded Crystal Amber (CRS:161p), the activist investment company I included as one of my 10 Bargain shares for 2015. The company mainly buys into small- and mid-cap UK equities where it sees opportunities to enhance long-term shareholder value through active engagement with companies. Crystal Amber bought shares in Aer Lingus well before the company became a takeover target and it was the companmy's largest shareholding by far.

But given the limited upside, the company has already banked a £10.8m gain on the stake and also received a £600,000 cash dividend. And this was not the only takeover situation as the recently announced takeover of Thorntons by Italian rival Ferrero has boosted Crystal Amber’s coffers further as it owned 18.9 per cent of the shares in the UK chocolate retailer. Crystal Amber has since banked a £7.5m gain on the £11.5m investment, adding around 6p a share to its last reported net asset value. In today’s trading update the company has revealed that its latest book value per share was 169.3p at the end of June, up from 160.8p a share at the end of May. Over the second quarter, the fund’s net asset value per share rose by an aye-catching 13.5 per cent.

Interestingly, Crystal Amber has already found a new target for its cash windfall, picking up 12.8m shares in residential landlord Grainger (GRI: 231p), a FTSE 250 constituent with a market value of £960m. The shareholding accounts for 3.08 per cent of Grainger’s issued share capital and around 20 per cent, or 34.9p a share of Crystal Amber’s own net asset value. Moreover, there is hidden value in Grainger's balance sheet as the reversionary surplus - the uplift from market value of its properties to vacant possession value, which will be realised as its tenants pass away – is estimated by the company at £500m, or half its market value. So with Grainger’s shares trading well below book value estimates of 250p a share which exclude the 120p a share reversionary surplus, and the housing market firm, it looks a solid holding to me.

So with Crystal Amber’s balance sheet still showing a healthy net cash position of 14.7p a share post the Thorntons and Aer Lingus stake sales, giving the company ample power to exploit further opportunistic stakebuilding in special situations, I feel that the shares are well worth buying on a bid-offer spread of 158p to 161p and 5 per cent below book value. There is also the prospect of a 5p a share dividend this year too. Buy.

MORE FROM SIMON THOMPSON...

At the end of April, I published an article with all of the share recommendations I have made this year. Since then I have published articles on the following companies:

■ Marwyn Value Investors: Buy at 220p, target price 260p ('Exploiting a value play', 5 May 2015)

■ Pure Wafer: Buy at 113p, target 140p to 150p; Paragon: Run profits at 440p, but buy on a confirmed breakout above the 445p and new target of 500p; 600 Group: Buy at 16.5p, target 24p; Fairpoint: Buy at 127p, target 190p; AB Dynamics: Buy at 207p, target 230p ('Repeat buy signals', 11 May 2015)

■ Globo: Buy at 56p, target 69.5p; Greenko: Hold at 70p; Pittards: Buy at 128p ('Breakout looms for mobile wonder', 12 May 2015)

■ Macau Property Opportunities: Buy at 214p; Dragon-Ukrainian Properties & Development: Hold at 28p; Raven Russia: Hold at 53p ('Overseas property plays', 13 May 2015)

■ Trakm8: Run profits at 135p; Redde: Buy at 120.75p, target 140p; STM: Run profits at 45p, but conditional buy on close of 48p and new target of 60p ('Smashing target prices', 14 May 2015)

■ Bilby: Buy at 75p, target 100p ('Buy to build' growth play, 18 May 2015)

■ Bioquell: Buy at 148p, target 170p to 185p; Somero Enterprises: Buy at 140p, target 185p; KBC Advanced Technologies: Buy at 109.5p, target 165p; Inspired Capital: Hold at 14.25p ('Three value plays', 19 May 2015)

■ Renew Holdings: Buy at 315p, target range 350p to 375p; Manx Telecom: Buy at 198p, target 210p ('Renewing old acquaintances', 20 May 2015)

■ Marwyn Value Investors: Buy at 228p, target 260p; Charlemagne Capital: Hold at 13.5p; Bloomsbury Publishing: Hold at 178p ('Lights, camera, action', 21 May 2015)

■ Anite: Buy at 91.5p, target 110p ('Testing a breakout', 26 May 2015)

■ Character Group: Buy at 415p, target 525p ('Playtime', 1 Jun 2015)

■ Tristel: Run profits at 96p; Pure Wafer: Buy at 123p, target range 140p to 150p; Crystal Amber: Buy at 153p ('Hitting target prices', 2 Jun 2015)

■ B.P. Marsh &Partners: Buy at 150p, target range 170p to 180p; Moss Bros: Buy at 110p, target range 120p to 130p; SeaEnergy: Sell at 15p ('Exploiting a valuation anomaly', 3 Jun 2015)

■ Globo: Buy at 59p, target 69.5p; London & Associated Properties: Buy at 38.5p; Greenko: Hold at 44p ('Catalysts for share price moves', 4 Jun 2015)

■ Burford Capital: Buy at 148p, target 190p ('Legal eagles', 8 Jun 2015)

■ Market strategy ('Financial Market Watch', 9 June 2015)

■ Software Radio Technology: Buy at 29.5p, target 40p to 43p; Tristel: Run profits at 92p; Creston: Buy at 136p, target 150p; Sanderson: Buy at 69p, target range 80p to 85p ('Blue sky potential', 10 June 2015)

■ 1pm: Buy at 67p, target 80p; Vislink: Buy at 58p, target 70p ('Small-cap growth stocks', 11 June 2015)

■ Elegant Hotels: Buy at 105p, target 135p to 140p ('Checking into an elegant investment', 15 June 2015)

■ First Property: Run profits at 45p; AB Dynamics: Run profits at 225p and target 250p; Inspired Capital: Sit tight at 20p (Bargain shares updates', 16 June 2015)

■ Trakm8: Run profits at 159p, new target 180p; Anite: Sit tight at 126.75p; Trifast: Run profits at 129p, target 140p; Record: Buy at 37p ('Small cap wonders', 17 June 2015)

■ Inland: Run profits at 71p, target 80p; KBC Advanced Technologies: Buy at 110p, target 165p; Caretech: Buy at 237p, target 300p ('Riding an earnings upgrade cycle', 18 June 2015)

■ Ensor: Buy at 97p, minimum target 125p ('Building up for a takeover', 22 June 2015)

■ GLI Finance: Buy at 54p, target 80p; Pittards: Buy at 128p; Netplay TV: Buy at 9.5p ('A tripple play of small cap picks', 23 June 2015)

■ Bilby: Run profits at 97p; Safestyle: Run profits at 220p; Epwin: Run profits at 134p ('Soaring small caps', 24 June 2015)

■ Faroe Petroleum: Buy at 86p, target 100p; Greenko: Hold at 65p; Communisis: Buy at 48p ('A slick investment', 25 June 2015)

■ Mountview Estates: Buy at 12,250p; Inland: Run profits at 71p, conservative price target ('Running bumper profits', 29 June 2015)

■ Redde: Run profits at 138p, target range 150p to 155p; Trakm8: Buy at 175p, target 200p; Cohort: Buy at 312p, target 365p; Burford Capital: Buy at 175p, target 190p; Flowtech Fluidpower: Buy at 135p, target 155p ('Riding earnings upgrade cycles', 7 July 2015)

■ Simon Thompson's book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 and is being sold through no other source. It is priced at £14.99, plus £2.95 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stockpicking'